Fatal System Error (9 page)

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Authors: Joseph Menn

Tags: #Business & Economics, #General, #Computers, #Security, #Viruses & Malware, #Online Safety & Privacy, #Law, #Computer & Internet, #Social Science, #Criminology

BOOK: Fatal System Error
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Ruth Parasol and Warshavsky invested millions in phone-sex companies that were sued by North Carolina and Nevada for improper billing and collection practices, such as threatening to seize the home of a woman in her sixties who denied making any calls. Beset with scams, the U.S. barred phone companies from cutting off customers who refused to pay 900-number bills. The Parasols and Warshavsky stayed one jump ahead of the law, moving quickly to put porn on the less-regulated Web. Quietly funded in part by the Parasols, Warshavsky became the best-known operator of Web porn through his Internet Entertainment Group. He bragged of the first widely accessible live sex shows on the Web and distributed the famous sex video made by Pamela Anderson and rocker Tommy Lee.
Ruth Parasol co-founded IEG, according to a close associate, but made sure her name stayed out of the papers. That fit a lifelong pattern of using her legal knowledge and smarts to plot in the shadows: she has never granted a media interview in her life. Warshavsky defrauded many of his business partners, and several former employees accused him of routinely overbilling customers. Ruth Parasol made sure she wasn’t one of his victims. By 1996 the Parasol family owned 49 percent of Warshavsky’s business, and they sued him, claiming he reneged on an agreement to buy out the family’s share. Before Warshavksy’s scheme collapsed, Ruth negotiated a favorable settlement in 1997. “She got a good deal,” according to an attorney involved in the talks. “She got their dough out and moved on down the road.” Facing massive debts and a criminal probe, Warshavsky eventually fled to Thailand.
ONCE AGAIN, PARASOL MOVED AHEAD of the curve. She read up on gambling law, consulted some of the top experts in the field, and figured out that online casinos could probably operate safely in other countries while taking money from gamblers in the U.S., where most betting was prohibited. The same year she got the settlement money out of Warshavsky, Parasol set up her first online poker business, Starluck Casino, which would grow into the multibillion-dollar sensation PartyGaming Plc., the parent of PartyPoker.
By 2001 Ruth Parasol’s Caribbean casinos said they were handling 3 million visitors a day. But the combined company known as IGlobalMedia had also attracted complaints, especially about the house’s frequent wins at blackjack and its roulette promotions, which offered double payouts for anyone betting on a single number.
Mysteriously, customers said, they would never win with that number, even if they played hundreds of times. After a while, the ranks of Parasol critics grew to include industry opinion leaders like Las Vegas actuary and casino consultant Michael Shackleford, also known as the Wizard of Odds. “My results clearly showed they weren’t fair,” Shackleford said. IGlobalMedia executives didn’t deny it, instead saying they had changed their ways. “We recently had our software developers run analysis on our games, and they did find some bugs and they have corrected them,” Chief Operations Officer Mario Wells wrote to a mathematician who complained.
The big breakthrough for Parasol was her early realization that Texas Hold ’Em could erupt in popularity. “IGlobalMedia casinos were low budget and not very reputable, but they made a good decision to go into the poker market while it was still young,” Shackelford said. “Kind of like eBay, they cornered the market.”
With card games, PartyPoker didn’t have to cheat. It took a small percentage of every pot, known as the rake. That made it the only sure winner in every hand. It was the perfect formula for investors: the only challenge was getting as many players to wager as much as possible.
Just being early wasn’t enough. Parasol had to promote her websites and draw in surfers, even if it meant paying a lot to other sites that referred them. For that, she turned to allies from her porn days. Later, when PartyPoker owner PartyGaming went public, its prospectus briefly noted that Parasol had been involved with “adult sites.” It said nothing about her partnerships with a series of rip-off artists who deceived tens of thousands of consumers and bilked investors out of tens of millions of dollars. Parasol’s personal spokesman, Jon Mendelsohn, said she “severed her ties” to the porn business in about 1995.
But Parasol kept at least her personal connections. She stayed in touch with Ian Eisenberg and others well known to law enforcement. She was also friends with Habari, close enough friends to give him a big hug when they saw each other at a Las Vegas porn-business convention. She recommended Habari for a crucial job near the top of the PartyGaming hierarchy. Once there, he oversaw a plan to provide PartyGaming’s interface to other poker sites, so people who thought they were playing at Empire Poker or other competitors were really spending their money at PartyPoker. He controlled where PartyPoker spent its massive advertising budget, mostly online, and compensated other websites based on how many players they converted. He also gave some a cut of whatever the players eventually lost at PartyPoker, a brilliant move that cemented PartyPoker’s lead and left hundreds of thousands of people trying their luck at a company with the barest of regulatory oversight. In its prospectus, PartyGaming credited its dominance over competitors largely to the online sales and marketing campaign.
In separate industry presentations during 2005, the thirty-eight-year-old Habari was identified as director of marketing at PartyPoker and director of online marketing at PartyGaming. But because of Habari’s past, the company decided he wasn’t the sort of person they wanted on the roster when it came time to court investors at the mammoth initial public offering (IPO), former employees said. Habari left full-time employment at Gibraltar-based PartyGaming just before the IPO, so the company didn’t have to disclose his shady background. By then, the company claimed more than half of the world revenue for regular table games. It had more than 400,000 active players and regularly hosted 70,000 at a time.
PartyGaming reinvested much of what it earned, spending heavily to advertise on Google, Yahoo! and other search engines, in sports publications, and in mainstream media to reach the largest possible American audience. In a 2003 stunt, PartyGaming held a live poker tournament onboard a cruise ship. It was broadcast as part of the World Poker Tour, which aired on the Travel Channel. PartyPoker began to buy millions of dollars’ worth of commercial time on the channel. The authorities took note. They might have great difficulty in prosecuting overseas gambling companies based on their interactions with customers in the U.S., their largest market. But they could at least follow the money as it came back to America for marketing.
In mid-2003, the Justice Department wrote to the National Association of Broadcasters, warning that accepting ads for offshore casinos could constitute aiding and abetting illegal activity. The officials wrote that “broadcasters and other media outlets should know of the illegality of offshore sportsbook and Internet gambling operations since, presumably, they would not run advertisements for illegal narcotics sales, prostitution, child pornography or other prohibited activities.” Most broadcast and cable outlets stopped accepting the ads. In 2004 the Justice Department went so far as to seize $2 million that PartyPoker had sent to the Travel Channel’s parent company for additional airtime. The
Sporting News
and the major search engines would later fork over millions to end the threat of federal legal action.
But Ruth Parasol wasn’t easily deterred. PartyGaming switched gears and sponsored television shows in the name of
PartyPoker.net
, an ostensibly nonprofit, educational site about poker that just happened to remind visitors about the main site,
PartyPoker.com
. The company became one of the chief backers of televised tournaments, where viewers could watch mountains of money getting passed back and forth over green felt emblazoned with the
PartyPoker.net
logo. Hold ’Em developed such a grip on the popular imagination that the 2006 James Bond film
Casino Royale
kept the fictional icon in a poker tournament for nearly a third of the movie.
PartyGaming nimbly took advantage of the craze. Its 2005 IPO proved to be the biggest on the London stock exchange in four years, vaulting PartyGaming past the likes of British Airways to a market value of $8.5 billion. Even after that offering, the company was majority-owned by just four people: two technologists from India and Parasol and her husband. The couple together owned 32 percent, worth more than $2 billion, and they sold out much of their stake before legal problems once again caught up with Parasol’s business. In 2005 Parasol entered the Forbes 400 list of the richest Americans at No. 164—that year’s highest rank for a woman without a fortuitous inheritance or marriage.
Barrett encountered Ruth Parasol just once. Prolexic had major poker firms in London as customers from its early days, and Barrett traveled there several times. Darren timed one trip for both of them to coincide with a casino industry conference. Staying at the swank Sanderson hotel, they were drinking one night off the lobby in the Purple Bar, a heavily draped watering hole that felt like the inside of a jewel box. Darren spotted Parasol and went up to shake her hand. PartyGaming had been hit with denial-of-service attacks too, but Darren didn’t take the opportunity to pitch her on Prolexic’s security services. Instead he set about hawking betting software from his other company, Digital Gaming, unintentionally underscoring his priorities. Darren did at least introduce Barrett to Parasol, who struck Barrett as very pretty.
“Nice to meet you,” Parasol said, giving a remarkably firm handshake for a woman. Then she turned on her heel and went back to her circle.
Yishai Habari, Parasol’s Gambino-connected henchman, escaped close scrutiny. In 2009, as CEO of Israel-based phone betting company 777Mobile, Habari was invited to speak at a London conference on fighting crime in online gambling. Speaking at the same conference were a detective from Scotland Yard and Lord Erroll, the leading voice on cybersecurity in British Parliament.
Parasol was far from the only tech-oriented crook or fellow traveler to make it big in the online poker business. BoDog founder Calvin Ayre, to give another example, made the cover of
Forbes
as a billionaire despite being fined for improper stock sales at a previous company. It was all too easy for the unprincipled to dodge the patchwork regulations of the Internet age and reap the giant payouts.
4
THE TURN
THROUGH 2005, BARRETT LYON struggled with the ethics of working at a company he was belatedly realizing was funded by illegal activity. He told Rachelle that gambling per se wasn’t that bad and that he was putting ill-gotten gains to the best possible use—defending companies against extortionists bent on destruction. Ruining businesses was a lot worse than setting the odds in a football game. Rather than argue the point directly, Rachelle asked questions, playing to Barrett’s abiding interest in the philosophy of ethics. Was it a problem that he was also earning money for people like Mickey Richardson and Brian Green, who cheated on their wives and might cheat him as well? What if some of that money was going to mobsters with guns who killed people? Would that be a problem? Yeah, it would, Barrett said.
Sensing Rachelle could be a problem for them, Darren Rennick and Brian put obstacles between her and Barrett. As her graduation date neared in mid-2005, they took Barrett to dinner and urged him not to let her move to Florida. He ignored them, and the couple reunited. Cohabitation brought a healthier lifestyle and a ready reality check. Brian had kept a room in Barrett’s apartment for his trips to the U.S., at times bringing home a stripper he called “the Brazilian” for the night. When he stopped coming, Barrett cleaned out Brian’s nightstand and found it full of syringes.
What thefuck?
Barrett thought.
I sure hope this means Brian has diabetes.
Even as Barrett worried about his sponsors’ ethics and management skills, the outside world’s opinion of Prolexic soared. Neither the FBI nor the U.K. team had ever told Barrett to keep mum about his help with the case against the arrested Russian hackers. His undercover work earned him a front-page
Los Angeles Times
feature in October 2004, making Barrett semifamous. Magazine writers and television crews showed up in his Florida offices, and the
New Yorker
wrote its version of the Ivan Maksakov tale the following year. The squad in London also continued to vouch for the young company.
There were other security firms that tried to fend off denial-of-service attacks, generally as part of a broad and expensive overall protection service. But none did what Barrett’s small company was doing for anywhere near the low price he charged. And none of them could boast that they had put a Russian extortionist behind bars.

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